HomeHome InsuranceHippo's underwriting U-turn fails to ease investor pessimism

Hippo’s underwriting U-turn fails to ease investor pessimism

Hippo Holdings’ shares failed to rebound this week even after the company reversed course on a recent underwriting pause in an attempt to address profitability woes.

The home insurance startup started writing new business this week on a limited basis less than a month after suspending the practice nationwide.

Hippo’s stock went on a roller-coaster ride after the pause was announced Aug. 15, rising 7.71% by Aug. 18 to $10.75 but then falling to $9.49 by Aug. 24.

This week’s announcement to start writing new business did not translate to upward movement for Hippo’s shares, which were trading at $9.40 as of midday Sept. 15. Rival insurtech Root Inc.’s stock rose by about 20% over that same period.

“[Investors have] probably far more pessimism in the stock than we’ve had in a while,” Keefe Bruyette & Woods analyst Tommy McJoynt said in an interview.

“There’s uncertainty as to whether once you’ve hit the ‘pause’ button, can you ever really turn it back on,” McJoynt added. “It will certainly take a bit of time to regain the trust and comfortability with older agents and the partners and reinsurers, so I think that is a big reason why the stock has seen some pressure.”

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That pressure ratcheted up another notch on Sept. 14 when a letter from two key shareholders was sent to the company’s board of directors. In that letter, Bradley Radoff and Etude Capital LLC requested a strategic review, accusing the company of generating “abysmal financial results” and “operating in an unsustainable manner.” Hippo did not respond to a request for comment.

Hippo CEO Rick McCathron during a presentation at the KBW Insurance Conference said new business would be resumed “in a very selective way in areas in which we think that we are priced adequately.” The halt was to allow the company to examine “catastrophic risks, geographical diversification, enhanced underwriting and rate actions for the Hippo Home Insurance Program,” McCathron added.

Hippo’s nationwide pause was the company recognizing how widespread its underwriting profitability issues were, KBW’s McJoynt said. Instead of pulling back in selected markets, it elected to “rip the band-aid off.”

“They reasoned it out as not wanting to play a game of whack-a-mole, where you think you’re OK in some geographies and it turns out you have to keep pulling back more and more,” he said.

Possible ‘progress’ in Q3

It is too early to know whether Hippo has managed to achieve near-term underwriting profitability, Kaenan Hertz, managing partner for Insurtech Advisors LLC, said in an email.

“However, the fact that Hippo has resumed writing new business in some states and product lines like their new home builders product, suggests that the company has made some progress,” Hertz said.

Other insurtechs, such as Root and Lemonade Inc., have been dealing with similar underwriting issues. Both companies posted net losses in the second quarter, with Root logging a loss of $36.7 million and Lemonade recording a loss of $67.2 million.

As far as how Hippo’s third-quarter results will look, Hertz expects a mixed bag. While the insurtech’s loss ratio will not be immediately impacted, it should improve in the long term “as the company diversifies out of natural catastrophe-prone areas,” Hertz said.

“Profitability may look stronger due to reduced spending, but overall premium growth will be lower,” he said.

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